ECB: Continue to Wait and See

As expected, the ECB kept its main refinancing rate unchanged at 1%. The introductory statement was very similar to the one released 3 weeks ago. The central bank believed current rates remain appropriate and risks to economic outlook are broadly balanced.

Same as previous months, upside risks to economy include more-than-expected improvement in confidence, stronger-than-expected recovery in world economy and foreign trades as well as strong-than-expected impacts of macroeconomic stimulus. On the downside, concerns remain relating to a stronger or more protracted than expected negative feedback loop between the real economy and the financial sector, renewed increases in oil and other commodity prices, the intensification of protectionist pressures and the possibility of a disorderly correction of global imbalances. Moreover, the ECB anticipates bank lending will deteriorate further.

Concerning gradual phase-out of extraordinary stimulus measures, the ECB said more details will be given in March. President Trichet did not give much insight regarding the issue at the press conference. When asked about the end-March 6-month LTRO, Trichet said the decision has already been made that it will end in March and more details will be announced next month.

Concerning Greece's 3-year plan to reduce budget deficit, the President said it 'steps in the right direction' but 'they must fix the goals that they have set for themselves'. At the January meeting, Trichet said that 'we will not change the collateral framework for the sake of any particular country' when asked about the ECB's plan to return to the standard collateral framework at year-end.

EUR extends the decline against USD and JPY after the announcement. Indeed, the euro has been trending lower amid concerns over sovereign credit. Although the European Commission pledged to support Greece's plan to cut deficit, unions in the country are planning strikes and demonstrations to oppose the plan. This indicates the government should face a lot of difficulties in implementing it.